• Euro falls to $1.13415, down 0.26% on the day and weakest since May 2025.
  • Broad dollar strength, driven by hawkish Fed expectations, and Europe’s energy crisis fuel the slide.
  • French political gridlock and German far-right gains add to euro-negative sentiment.

Euro Breaks Key Support

The euro tumbled to a 16-month low against the US dollar on Friday, breaching the $1.1350 level that analysts had flagged as critical support. The single currency was last down 0.26% at $1.13415, having earlier touched $1.1312, its weakest intraday level since May 2025. The move extends a September decline of about 2% that has erased the euro’s earlier gains from a rally that had pushed it close to $1.20 in August.

“It’s a dollar story more than a euro story,” said a currency strategist at a major European bank, who asked not to be named because the views are private. “The Fed is expected to keep tightening, and US yields are drawing capital away from the euro area.”

Fed Tightening Prospects Lift Dollar

Markets are pricing a more hawkish Federal Reserve path after the central bank’s September rate increase, with futures indicating roughly a 68% probability of another 25-basis-point hike in October. The Fed’s target range now stands at 3.75%–4.00%, while the European Central Bank’s deposit rate is just 2.50%. That 125-basis-point gap creates a structural headwind for the euro, as dollar-denominated assets offer higher returns.

“The interest rate differential is the primary driver,” said Kaspar Hense, a portfolio manager at RBC BlueBay Asset Management. “As long as the Fed remains data-dependent and US inflation stays sticky, the dollar will find support.”

Energy Shock Compounds Euro’s Woes

Europe’s vulnerability to higher energy costs is amplifying the currency’s decline. Disruptions to LNG flows through the Strait of Hormuz have pushed European natural gas prices above €80 per megawatt-hour, the highest since late 2022. The euro area’s reliance on imported energy means higher gas and oil prices widen the trade deficit, weigh on growth, and complicate the ECB’s inflation fight.

“Higher energy bills reduce household purchasing power and pressure corporate margins,” said an analyst at a European think tank. “That’s a direct hit to the euro’s fundamentals.”

Political Risk Adds to Downward Pressure

Political uncertainty in France and Germany is adding to the euro-negative mix. In France, concerns over public debt and gridlock ahead of the 2027 presidential election have widened the spread between French and German 10-year government bond yields above 110 basis points. Bank of America (BAC) strategists estimate that each additional 10-basis-point widening could knock about 0.4% off EUR/USD.

In Germany, recent state-election gains for the far right have raised questions about Chancellor Friedrich Merz’s ability to push through his reform agenda. “The political backdrop is a slow-burn risk,” said Jane Foley, head of FX strategy at Rabobank. “It’s not the main driver today, but it’s contributing to the euro’s risk premium.”

Technical Levels and Outlook

Analysts are watching the 1.1355–1.1394 zone, which provided support in June and July before a rebound. A monthly close below 1.1355 could open the way toward 1.1228 and then 1.1110–1.1164, according to Forex.com technical analysis. On the upside, a recovery above 1.1578 would signal that a more durable low may be forming.

“If European gas prices settle in the €85–€100/MWh range, EUR/USD could move toward $1.12,” said Hense. ING (ING) has said an oil move toward $115 per barrel would add further pressure.

Not everyone is bearish. ING maintains a $1.16 year-end forecast, though Rabobank’s Foley is reconsidering a similar three-month target. “The euro is cheap, but it can get cheaper,” she said. “We need to see a change in the energy picture or a dovish Fed pivot to turn the tide.”

What to Watch

Traders will monitor Fed statements, US inflation and labor-market data, and market-implied odds of an October hike. On the European side, ECB communications, euro-area inflation, and wage data will be key. Energy prices, LNG shipments through the Strait of Hormuz, and French-German bond spreads remain critical barometers of risk. “The next durable direction depends on whether Europe’s energy shock recedes before it damages growth, and whether the Fed’s tightening path proves as aggressive as markets expect,” said a strategist at a US investment bank.

Correction: An earlier version of this article misstated the ECB deposit rate. It is 2.50%, not 2.25%.